Retirement Corpus - How? How much?

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For a comfortable retirement, it’s essential that you start saving early, choose good products, avoid debt and review your retirement plan from time to time.

“Retirement is when you Stop living at Work and Start working at Living”. If you are already retired or close to retirement, you need to find a way of generating revenue without the need to work. The only way to earn without work is to invest your money in something that works.

There are several mandatory obligations to be satisfied with your retirement corpus. You must create an emergency fund in the first place, and then you have your day-to-day expenses, and after, all these commitments your personal desires which give the satisfaction of living.

These are some basic, but important steps that you should strictly follow:

  1. Start Young: ‘Sooner the better is a phrase exactly applicable here. When you start early, you need to shell out less to achieve a big corpus, rather than shelling out a big amount at a later age compromising on current expectation.
  2. Step Up: In order to get a big corpus, you need to increase the investment with an increase in salary or liability or responsibility. Apart from stepping up your savings in a disciplined fashion, it is important not to stop your SIPs or make abrupt changes to your asset choices during bearish times. Persisting through these phases is in fact what reduces your acquisition costs and bumps up your long-term return from equities.
  3. Do not forget inflation: Inflation is generally missed from the calculation and is the biggest mistake. Rs. 100 today will not be the same even after a year. Considering 10% inflation, an item worth Rs. 100 today will cost you Rs. 110 a year from now, so your purchasing power decreases. So your investment should consider inflation, without which the whole plan will fail.
  4. Do not stick to PPF or EPF: Many believe monthly investment in PPF or EPF will alone help in getting the retirement corpus, which gives around 8% pa return on it. The main competitor to your rate of return is inflation, which is above 8%. Hence you are actually incurring loss and hinder the goal of retirement corpus. Rather try other options as well based on your risk appetite.
  5. Review and Adjust: Regular reviewing your portfolio and adjusting based on market situations is the key. You may come to know if your way of investment is going incorrect direction or needs a change.

The real questions are How to create? How much will be enough?  The simple rule here is it doesn’t happen immediately, but will discipline and strategised investment.

How much? How? Will it be enough? – These questions come by default in everyone’s mind when planning how much corpus will be required for a comfortable retirement. Follow these points:

  1. Split current monthly expenses into two: The first step is to calculate how much your expenses will be in retirement. Draw up a list of your total expenses. Most regular expenses such as grocery and utility bills, clothing, gifting and house maintenance will continue even after retirement.
  2. Calculate expected income after retirement: The next step is to calculate your total income from all sources. Whether it is pension from the company, pension under the EPS from EPFO, income from any insurance plan or pension policy, include all such incomes in the calculation.
  3. Calculate net income needed in retirement: Next, calculate the net requirement by deducting the value in Step 2 from the value in Step 1. For instance, if your expenses are Rs 60,000 a month and your expected income is Rs 26,000, you need Rs 34,000 more.
  4. Calculate the future value of the additional income needed during retirement: The additional income needed may appear small now. However, it will increase with time due to inflation. Though the current headline inflation is below 3%, experts advise investors to use the long-term average of 6% in their calculations.
  5. Calculate the retirement corpus needed at 60: Calculating the retirement corpus needed at 60 is a bit complicated because it depends on the life expectancy, asset allocation and the returns expectations considered for different asset classes.
  6. Find out how much have you accumulated: Most people would have also accumulated some corpus dedicated for retirement through various instruments (EPF, PPF or NPS or other investment). Add all these up to know how much is your current corpus for retirement.
  7. Calculate how much your current retirement corpus will grow: The next step is to calculate how much will the current corpus grow. Due to the power of compounding, the growth will be higher for younger people.
  8. Calculate the additional corpus needed for retirement: Once you calculate the total retirement corpus needed at 60 and how much your existing corpus will grow by 60, computing the additional corpus required is easy. Just deduct the value derived in Step 7 from the value in Step 5.
  9. Calculate how much is required to be saved per month for additional retirement corpus: This needs a good amount of calculation considering inflation, net present value, percentage return needed or achievable, etc.
  10. Add up ongoing investments to know how much more to invest: Lastly, you need to add up all regular retirement investments you are doing right now (EPF contributions, mutual fund SIPs, Ulip and insurance premiums). Deduct this figure from the value derived in Step 9 to find out how much additional contribution is needed per month.

Reply to this blog with your query/requirement and we will get back to you with a strategically prepared plan.

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